Bharti is our top pick because it is better capitalised than Idea Cellular at least for the time being; it is also generating healthy cash flows, says Giri.ET Now | Updated: December 28, 2015, 16:40 IST

In an interview with ET Now, GV Giri, Analyst, IIFL, shares his views on the soft launch of 4G services by Reliance Jio. The expert also talks about the likely impact of Jio's full-fledged launch on telecom incumbents. Excerpts:

ET Now: What are you views on the soft launch of Rel Jio's 4G service on Sunday? How do you see things shaping up from here on? Do you think that the move would give more muscle room to competitors to beef up, before the commercial launch? When do you expect the launch to happen?

GV Giri: The commercial launch will probably happen in the third quarter of next calendar year. In terms of beefing up of competitors, Reliance Jio requires the handset market to be filled with 4G handsets to a reasonable extent, which is not the case now. Let us see how it moves forward. So far, it seems to be progressing rapidly. There will be some advantage to competitors because Jio launch now seems to be delayed by more than what people had expected. But that advantage would not be much.

In the long run, all these things do not matter. Whether Jio and the other competitors are successful would really depends on the industry's health more than anything else. If you see the incumbents after a couple of decades in the business, their return on equities (ROEs) have not been stellar. The government and the TRAI also seem to be taking a punitive stance against the telcos every now and then. So they are in a bad psychological space. The industry has to do well and that is really what will determine where Jio measures up and whether the competitors can take advantage of Jio's delay or not. These are small matters. The bigger issue really is the outlook for the industry.

ET Now: I just spoke to Himanshu Kapania of Idea Cellular, where he sounded fairly confident about the outcome of the Jio's competition in the data space and the financial health of the company, given the spate of capex and the investments that it has had to make. Kapania is of view that the industry has been through such things in the past and he sees it to be no different case. Do you think that this time around, it is slightly different than earlier times?

GV Giri: Clearly because amidst all the talk of a heavily-muscled competitor coming in, one must not forget that the overall law that circumscribes the health of any one competitor in the system is the fact that no company can have more than 25 per cent of the total spectrum in the market. So there will be about three or four companies with just about equal amount of raw material.

You might say that capital makes a difference and Reliance Jio is indeed well-capitalised. The company has poured in a lot of investments, but so have the others. Therefore in the long run, it is the service quality and the commitment to the business, and skills with which decisions are executed, are what will make the difference. I do not think things change much incrementally. The other issue to remember is that indeed Reliance Jio is coming in, but we have also seen three smaller companies making an attempt to merge and, therefore, consolidation is happening at the bottom end of the system. Both these things have be weighed simultaneously.

ET Now: In light of that, from investors' perspective, there are three options, there are three stocks to play with ie.e Bharti Airtel, Idea Cellular and 'comeback from the brink' kind of a player Reliance Communications, (RCom). If you were to recommend a stock, which of these three would be and why? Let us assume that the investor is net neutral. He is not an institutional investor, who will not subscribe to RCom. What would be your best case investment in the telecom space currently?

GV Giri: We have buy recommendations on Bharti Airtel and Idea Cellular. Among them, Bharti is our top pick because it is better capitalised than Idea Cellular at least for the time being. Bharti is generating healthy cash flows from its Indian operations and it seems to have a good stock of spectrum, thanks to its performance in auctions in the last of couple of years.

As said, we also have a buy recommendation on Idea Cellular. Both these stocks have been beaten down to such an extent that we tend to look at the outlook for the stock in light of the stock price. While the outlook for the sector is slightly grim, stocks are reflecting that pessimism.

ET Now: How do you look at RCom's strategy?

GV Giri: RCom is making all the right moves. This is actually the right thing they have done: Hunt out competitors, who are having spectrum but are not optimally utilized. The company is trying to get such assets under its own belt. But the biggest issue with RCom is how much its debt will be, when all this settles down. On that front also, tower and optic fibre deals and non-telecom moves such as selling of real estate and other unrelated parts of the telecom business such as the global cloud exchange are steps in the right direction. We will need to see how it looks when everything settles down. At the moment my guess would be that even after doing many of these things, the debt on its books would quite be substantial.

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BSNL is yet to get the department of telecom (DoT) nod for commercially rolling out 4G services while the Narendra Modi-led government is eyeing to launch fifth-generation or 5G technology together with matured markets worldwide in 2020.